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Diversification helps Google ride the waves of coronavirus turbulence

Alphabet-owned Google certainly felt the pinch of COVID-19 over the last few weeks of the quarter, but CEO Sundar Pichai identified diversification as key to managing the crisis.

While few would complain when looking at the Google spreadsheets over the last three-months, it might not be living up to the milestones it has set itself in previous years. 13% year-on-year growth could be considered miserly in Google’s standards, but the coronavirus pandemic is a crisis few have experience with.

That said, investors are clearly pleased with the was Pichai and the team are managing the difficulties as share price shot up 8% during pre-market trading.

Google Q1 Financial Results (USD ($), millions)
Metric 2020 Year-on-year
Total revenues 41,159 +13%
Operating income 7,977 +20%
Net income 6,836 +3%

These are all attractive numbers, though coronavirus has inflicted a dent into the business. Pichai highlighted online advertising demand, the core revenue machine of the Alphabet group, was severely weakened from March onwards, as the full-impact of COVID-19 forced society and the economy to close doors.

Performance of individual business units (USD ($), millions)
Business Unit 2020 Year-on-year
Google Search 24,502 +8%
YouTube 4,038 +33%
Network Members’ properties 5,223 +4%
Google Cloud 2,777 +52%
Other Bets 135 -21%
Google other 4,435 +22%

In today’s world, where there is still plenty of unrealised profits in the digital economy, making money does not seem to be good enough. Investors demand high-growth year-on-year, partly due to what is available and partly because they have become used to it. This is the challenge which the likes of Google, Amazon and Facebook are facing; matching the success of yesteryear.

But in this period of uncertainty, it does appear to be a case of damage limitation. Like the financial crisis of 2008, everyone will be impacted but Google has somewhat of an advantage.

“…our business is more diversified than it was in 2008,” Pichai said during the earnings call. “For example, Cloud. In the public sector, we are helping governments delivered critical health and social services. We are supporting the state of New York, new online unemployment application system as it deals with a significant increase in demand.

“In retail, we have held Loblaw, one of Canada’s largest food retailers, and Wayfair, scale to support exponential traffic increases. We are helping communication companies adapt to new behaviour patterns. Vodafone is using Google Cloud platform to help that analyse network traffic flows to keep everyone connected, and we are helping Unity Technologies keep real time online games stay up and running.”

Google Cloud is the business unit which is perhaps profiting the most from the current crisis as more companies are forced through a digital transformation programme to embrace cloud solutions and enable workforce mobility. Some might complain about Google sinking billions into the Moonshot Labs every year, but this is the very reason why.

The more diversified revenues are, the more resilient a business is when faced with turmoil, irrelevant as to whether it is precedented or unprecedented. Google now has online advertising, cloud and video as three major sources, with plenty more bubbling away.

Over the three-month period, Alphabet CFO Ruth Porter said revenues for the Other Bets unit were $135 million, while operating loss was $1.1 billion. This might seem like a remarkable number, but these losses could eventually turn into the next Moonshot Graduate to make billions for the Group. Let’s not forget, the cloud business unit, YouTube, Maps and Android were all cultivated in these labs.

Currently in the experimental unit is Google’s self-driving car project Waymo, a delivery service using specialized drones known as Wing, life science tech unit Verily, smart city initiative Sidewalk Labs and Makani, an attempt to create renewable energy from propellers on airborne kites. Outside of these homegrown experiments, Google purchased Fitbit for $2.1 billion last year, taking it into the world of wearables.

Each quarter, the core advertising business unit brings in billions in profit, but dependence on these revenues are lessened. As the alternative revenue streams gather momentum, Google becomes more diversified and much more capable of managing global crisis’ which could cripple rival firms.

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